Diamonds Are the Market's Best Friend

Shares in diamond retailer Tiffany & Co. (NYS: TIF) are soaring since the company reported second-quarter earnings yesterday. Despite the market's reaction, however, the actual results and forward guidance are much more muted.

Opening Tiffany's little blue box
Total sales for the quarter came in at $887 million, an increase of 1.6% over the same period a year ago. After factoring in expenses, its net income of $92 million, or $0.72 per share, was up 2% on a year-over-year basis. The latter missed Wall Street estimates by two pennies a share.

The strongest geographic performance was notched by the Japan region, where total sales and comparable store sales were up 10% on a constant-currency basis. In the United States, meanwhile, total sales were flat while comps were down 5% -- at its flagship location on Fifth Avenue in New York City, which is responsible for a staggering 10% of the company's revenue, sales were down a stunning 9%. And in its fastest growing Asia-Pacific region, total sales were tempered, growing only 3% while same-store sales fell by 5% on a constant currency basis.


Total Sales Growth*

Same-Store-Sales Growth*

Percent of Overall Business

















Source: Tiffany's Q2 2012 earnings release. *Sales reported on a constant-exchange-rate basis.

The reason shares in the company are nevertheless up is that analysts had predicted a much sharper decline in same-store sales. Overall revenue at stores open at least a year fell 1%, handily beating predictions of a 4% drop.

Looking forward, the company dropped both its sales and earnings forecasts for the remainder of the year. In terms of revenue, it now sees worldwide net sales increasing 6%-7% compared to a previous expectation of 7%-8% growth. In terms of earnings, management expects full-year earnings per share of $3.55-$3.70, compared to its previous forecast of $3.70-$3.80 per share.

According to the company's chairman and chief executive officer, Michael Kowalski:

We think it is only prudent to maintain a cautious near-term outlook about global economic conditions and the effects on customer spending, with year-over-year growth comparisons in the next few months also being pressured by the strong increases we experienced last year. At the same time, we are determined to further strengthen Tiffany's competitive position by expanding our store and customer base and introducing enticing new designs, all intended to generate solid long-term financial performance.

Shares in Tiffany & Co. currently yield 2.5%, are down more than 5.3% year to date, and trade at more than 18 times earnings.

How other luxury retailers are faring
At the end of July, luxury handbag and accessories maker Coach (NYS: COH) saw its share price fall sharply after the company reported results for the quarter ended June 30. Even though earnings for the quarter surged 24% on a year-over-year basis, analysts were disappointed by the company's same-store sales, which rose just 1.7% in is North American stores, well below the consensus estimate of 6%.

According to the company's chairman and chief executive officer: "In North America ... an increasingly promotional environment led to lower growth than expected in factory stores. As a result, we responded by reinstating our prior practice of in-store couponing in a cross section of factory locations late in the period."

Meanwhile, shares in luxury retailer Saks (NYS: SKS) are up double digits since the beginning of August after the company reported better-than-expected results two weeks ago. For the quarter ended July 28, the company reported a net loss of $0.08 per share compared to a loss of $0.05 in the previous year's quarter. Excluding one-time charges associated with the company's new fulfillment center in Tennessee, the company lost $0.05 per share. Both figures exceeded analysts' expectations for a loss of $0.09 a share.

Foolish bottom line
After the financial crisis, luxury retailers were among the first in their industry to recover, as higher-net-worth individuals resumed spending shortly thereafter. It now appears this trend may be stalling, at least here in the United States and in Europe.

It's for this reason that our analysts drafted a free report detailing three American companies set to dominate the world. Unlike Tiffany's, Coach, and Saks, these companies are so geographically diversified that they're effectively impervious to regional economic slowdowns. To learn the identity of these companies before it's too late, click here now.

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Fool contributor John Maxfield does not own shares in any of the companies mentioned above. Motley Fool newsletter services have recommended buying shares of Coach. Motley Fool newsletter services have recommended shorting Tiffany. The Motley Fool has a disclosure policy. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. Try any of our Foolish newsletter services free for 30 days.

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